Shareholders Agreement

The stated Objectives of the Company are to run the Business as a Social Enterprise and carry out activities to achieve the Mission.

The "Mission" is the Company's purpose. It must be written into the Shareholders Agreement when it is signed. It should describe, in plain language, what social or environmental outcome the Company exists to achieve, for example, "providing employment for disadvantaged young people" or "diverting waste from landfill and keeping materials in continuous use at their highest value." The Mission is a key defined term used throughout the Shareholders Agreement and in the related Subscription Agreement, so it should be worded carefully.

The Mission is intended to be protected in two ways:

• Reserved matter: any major change to the Mission, and any action (or failure to act) that could reasonably lead to the Company losing its Social Enterprise certification, needs a special type of Board approval called a "Required Resolution".
• Shareholder promise: each shareholder is required to use their rights as a shareholder to support the Company's main activity of pursuing the Mission. This is a personal legal obligation each shareholder takes on when they sign the Shareholders Agreement.

As drafted, changing the Mission would likely need two levels of approval: (1) the Company and holders of no less than 75% of the shares on issue must agree (because it is a change to the Shareholders Agreement), and (2) the Board must pass a Required Resolution (because a material change to the Mission is a reserved matter). These approval levels can be adjusted to suit the parties. The interaction between these requirements should be confirmed with legal advice.

The "Certifying Body" is defined in the Shareholders Agreement as an authorised or respected body in the social enterprise community certifying entities as a Social Enterprise. This may include Social Traders certification and/or People and Planet First Verification.

Users should also consider whether an alternative or additional certifying body may be appropriate for their circumstances. For example:

• B Corp certification (administered by B Lab) may be relevant for for-profit entities seeking global impact certification; and
• Supply Nation certification may be relevant for Indigenous businesses.

If any of these apply, the document may need extra changes to meet those certification requirements.

The Company must take reasonable steps to keep its Social Enterprise certification current with the relevant Certifying Body. This is an ongoing obligation, it is not enough to be certified only at the time the Shareholders Agreement is signed.

The Shareholders Agreement deliberately does not say what happens if certification is lost. This gives the parties room to agree on consequences that suit their situation. For example, losing certification could be treated as a default, or could require a special Board decision. We recommend seeking legal advice if you want to deal with this expressly.

The Board must develop and maintain a policy for paying profits to shareholders that is consistent with operating as a Social Enterprise, and the Company must always comply with the Certifying Body's rules on distributions. As drafted, the total distributions that Company can make to shareholders in any period cannot exceed the verified public benefit created by the Company in that same period (as accepted by the Certifying Body).

The relevant time period is the "Distribution Period" which is not necessarily a single financial year. This is intended to benefit early-stage companies that may reinvest profits and not make distributions in their initial years of operation. For example, if no distributions are made for three years, the permissible distribution is measured against the public benefit created over that entire three-year period, not a single year.

A defining feature of social enterprise investment is that financial returns to shareholders are limited by the Company's verified public benefit. Unlike a conventional company, where distributions to shareholders are constrained only by solvency and the availability of profits, this template caps total distributions at the level of public benefit the Company has created in the relevant period (as accepted by the Certifying Body).

This means that an investor's financial return is connected to the social or environmental impact the Company delivers. A company that generates limited verified public benefit will be restricted in how much it can distribute to shareholders, regardless of its profitability.

However, this model does not necessarily mean reduced financial performance. Social enterprises that demonstrate genuine impact may benefit from enhanced consumer trust and brand loyalty, preferential access to government and institutional procurement frameworks, growing demand from impact-conscious consumers and corporate partners, and access to concessional capital and grant funding that is unavailable to conventional businesses. These factors can support sustainable growth and, in turn, increase the pool of verified public benefit against which distributions are measured.

For investors, this is an important feature to understand before committing capital. It reflects the character of social enterprise — that the business is purpose-driven, with financial returns to shareholders operating within the framework of the Company's mission. Investors should satisfy themselves that they are aligned with this model and that their return expectations are consistent with the distribution framework before proceeding with the investment.

It is important to describe the "Business" accurately when filling in the Shareholders Agreement, because the definition affects several other provisions, including the Objectives, the reserved matters, and the restraint clause (which stops shareholders from competing with the Company). If the definition is too broad, it might accidentally restrict what the Company can do in the future; if it is too narrow, it might not properly cover what the parties expect the Company to be doing.

The "Business Plan" is intended to set out what the Company plans to do, including proposed activities, capital spending, budgets, funding, staffing, and any research and development.

Although the Business Plan is defined in the Shareholders Agreement, there is no rule requiring the Board to actually adopt one. Parties may want to add a rule requiring the Board to adopt a Business Plan within a set time after signing and to update it periodically. This can help keep shareholders aligned on where the Company is heading. We recommend seeking legal advice if a formal Business Plan process is important to you.

As currently drafted, the Company must have at least one director and no more than five, not counting alternate directors and directors appointed by major shareholders. Parties should consider what numbers are appropriate for their situation, a single director company may work for a very early-stage business, but investors will typically expect at least two directors.

A major shareholder holding more than 20% of the shares (called an "Appointing Shareholder") can appoint one director to the Board by giving written notice to the Company, and can remove or replace that director at any time. A director appointed this way stays in the role until the Appointing Shareholder removes them or until the Appointing Shareholder's shareholding drops to 20% or less, at which point the director automatically loses their position.

The 20% threshold means only major investors get to appoint a director. You should think about whether this level is right for your shareholding structure. A lower threshold (for example 10%) would give more investors this right.

The Company can only do the things listed in Part A of Schedule 2 if the Board passes a "Required Resolution." A Required Resolution requires approval by a majority of eligible directors, which must include the vote of any director appointed by an Appointing Shareholder. You should consider whether this threshold is appropriate for your situation.

This is intended to give the investor-appointed director (if there is one) what is, in practical terms, a veto over Part A reserved matters. To balance this, the list of Part A matters has been kept deliberately short, covering only critical decisions that could seriously affect the investor's interest. This is intended to help ensure the Founder retains control of everyday operations. Parties should seek legal advice on whether this balance is appropriate for their circumstances.

The Company can only do the things listed in Part B of Schedule 2 if the shareholders approve by "Special Resolution", requiring approval of holders of 75% or more of the shares.

Part B is limited to decisions so significant that Board approval alone is not enough: currently, changing the rights attached to any shares and changing the Constitution. The 75% figure is the standard threshold for a special resolution, though here it is calculated against all issued shares (not just votes cast at a meeting), which is a slightly higher practical bar than the Corporations Act default. Parties should carefully consider whether this threshold is appropriate for their circumstances.

If the Board decides to issue new shares, the Company must first offer each existing shareholder its fair share of the new issue. This is designed to protect existing shareholders from having their ownership diluted without the chance to maintain it. Shareholders have 10 business days to accept, and shares not taken up are re-allocated among those who want more. Certain issues are excluded from this process.

If a shareholder wants to sell its shares, it must first offer them to the other shareholders at the same price and on the same terms before selling to an outsider. This is intended to give existing shareholders a "right of first refusal" and help prevent the Company from ending up with an unwanted outsider as a shareholder.

A "tag along" right is designed to let a minority shareholder join in when a larger shareholder is selling to a third party, so the buyer must also buy the minority's shares on the same price and terms. It is intended to protect the minority from being left behind as a small shareholder alongside a new owner they did not choose.

The tag along right is triggered when a shareholder (or group of shareholders) receives a genuine third-party offer to buy at least 50% of the Company's shares and accepts it. In other words, the minority can insist on being included once a sale reaches a "change of control" scale, but not for smaller sales below that level. This 50% trigger differs from the 75% drag along threshold below. You should confirm that 50% is the right balance between protecting the minority and allowing the majority to sell down freely.

A "drag along" right is designed to let a selling majority force a minority to sell too, so that a small holdout cannot block a sale of the whole Company that the majority wants to go ahead with. It is intended to protect the deal, and ultimately the value, for the majority and for a buyer who usually wants to buy the entire company, not just part of it.

Under the current draft, if a bona fide third-party offer is made for all of the Company's shares and holders of at least 75% of the shares want to accept, they can force the remaining shareholders to sell on the same terms. The 75% threshold means the drag can only be used with very broad support, not by a bare majority. You should confirm the threshold and any Mission safeguard before the Shareholders Agreement is finalised.

The restraint clause applies to Restrained Shareholders — being shareholders who are (or have been) directors, officers, employees or consultants of the Company. This includes the Founder and any operational shareholders.

The restraint does not apply to shareholders who are purely financial investors (such as an impact investor subscribing for shares under the Subscription Agreement) unless they also hold an operational role within the Company.

Restraint of trade clauses are enforceable under Australian law only to the extent they are reasonably necessary to protect a legitimate business interest. The legitimate interests protected by a restraint clause typically include the Company's goodwill, client relationships, confidential information and trade secrets.

These interests are at risk from persons who have been directly involved in the Company's operations — founders, directors, key employees and consultants — who have access to the Company's clients, confidential information and know-how, and whose competitive activity following departure could genuinely harm the business.

A financial investor who does not participate in the management or operations of the Company is unlikely to pose the same competitive threat. Extending the restraint to such an investor:

• may be unenforceable, as a court may find no legitimate interest is being protected;
• is commercially unusual in the Australian market for impact investment transactions;
• may conflict with the investor's portfolio strategy; and
• could deter mission-aligned investors from participating.

The clause is drafted so that each combination of time period and geographic area operates as a separate, independent covenant. If a court finds the widest combination to be unenforceable, it may sever that combination and enforce a narrower one, rather than striking down the entire restraint. This "cascading" approach is standard practice for Australian restraint clauses and is designed to maximise the prospects of enforceability.

Parties should seek legal advice on whether the time periods and geographic areas inserted into the document are appropriate and likely to be enforceable.